The Source of Wealth

I was stuck in the airport at Salt Lake City on Sunday for a bit due to a large snowstorm** and I was trapped watching the CNN airport channel (which certain airports make unavoidable -- you can't get away from the TV's in a way reminiscent of a variety of distopian novels).  Anyway, I heard some discussion about differences between poor and rich nations, and all the usual easy-to-prove-false memes came out to explain the differences.  Natural Resources:  So why do resource-rich Russia and sub-Saharan Africa do so poorly?   Colonialism:  How do you explain Hong Kong, Australia, and Canada?  Exploiting labor:  So why aren't the most populous countries the richest?  Luck:  How do countries like Haiti have so consistently bad luck for over 200 years?

So here is Coyote's First Theorem of Wealth Creation, first expounded in this post on the zero-sum economics fallacy:

Groups of people create wealth faster in direct proportion to the degree that:

  1. Their philosophical and intellectual
    culture values ordinary men (not just "the elite", however defined) questioning established beliefs and social patterns.  This is as opposed to having a rigid orthodoxy which treats independent thinking as heresy.
  2. Individuals, again not just the elite, have the ability through scholarship or entrepreneurship to pursue the implications of their ideas and retain the monetary and other rewards for themselves.  This is as opposed to being locked into a rigid social and economic hierarchy that would prevent an individual from acting on a good idea.   

China, for example, just by cracking open the spigot on #2, however inadequately, has gone from a country with mass starvation in three or four decades to one where the worry-warts of the world are scared of juvenile obesity.  To a large extent, this theorem is really just a poor restatement of Julian Simon's work.  Simon's key point was that the only relevant resource was the human mind, from which all wealth flows.  All I have done is break this into two parts, saying that to create wealth a society has to value the individual's use of his mind and has to allow that individual free reign to pursue the products of his thinking.

One of the applications where I think this is useful is to explain the great millennial hockey-stick curve.  No, not the temperature hockey stick, which purports to show acceleration of global warming, but the wealth curve.  The world's growth of per capita wealth was virtually flat for a thousand plus years, and then took off in the 19th and 20th centuries.  I previously explained this hockey stick using my wealth creation theorem:

Since 1700, the GDP per capita in places like the US has
risen, in real
terms, over 40 fold.  This is a real increase in total wealth, created
by the human mind.  And it was unleashed because the world began to
change in some fundamental ways around 1700 that allowed the human mind
to truly flourish.  Among these changes, I will focus on two:

  1. There was a philosophical and intellectual
    change where questioning established beliefs and social patterns went
    from being heresy and unthinkable to being acceptable, and even in
    vogue.  In other words, men, at first just the elite but soon everyone,
    were urged to use their mind rather than just relying on established
    beliefs
  2. There were social and political changes that greatly increased
    the number of people capable of entrepreneurship.  Before this time,
    the vast vast majority of people were locked into social positions that
    allowed them no flexibility to act on a good idea, even if they had
    one.  By starting to create a large and free middle class, first in the
    Netherlands and England and then in the US, more people had the ability
    to use their mind to create new wealth.  Whereas before, perhaps 1% or
    less of any population really had the freedom to truly act on their
    ideas, after 1700 many more people began to have this freedom. 

So today's wealth, and everything that goes with it (from shorter
work hours to longer life spans) is the result of more people using
their minds more freely.

The problem (and the ultimate potential) comes from the fact that in
many, many nations of the world, these two changes have not yet been
allowed to occur.  Look around the world - for any country, ask
yourself if the average
person in that country has the open intellectual climate that
encourages people to think for themselves, and the open political and
economic climate that allows people to act on the insights their minds
provide and to keep the fruits of their effort.  Where you can answer
yes to both, you will find wealth and growth.  Where you answer no to
both, you will find poverty and misery.

Update:  This article from Frank Moss, linked at Instapundit, takes these same concepts forward into the future.

What role will startups play in the future?

I see tremendous economic growth from startups from 10 years ago.
Entrepreneurs will go from the 1,000 startup ventures funded in the
last 10 to 20 years to ideas coming from people working together in
network-based environments, using computers to dream up innovations in
a way they never did before. It could be people in developing countries
with low-cost computers.

You talk about education and the bottom-up effect that millions
more people will play in societal advances. How do you see this
unfolding?

We will undergo another revolution when we give 100 million kids a
smart cell phone or a low-cost laptop, and bootstrap the way they learn
outside of school. We think of games as a way to kill time, but in the
future I think it will be a major vehicle for learning.

Creative expression (is another area). No longer will just a few
write or create music. We will see 100 million people creating the
content and art shared among them. Easy-to-use programs allow kids to
compose everything form ringtones to full-fledged operas. It will
change the meaning of creative art in our society.

We are already seeing early signs of it in blogs. The source of
creative content is coming from the world. That revolution will go well
outside of the written word to all forms of visual and performing arts.

 

** Kudos by the way to the SLC airport - when I drove in, I couldn't see 10 feet in front of me on the road due to the snow, and I was sure that I would be trapped for the day.  Living in Phoenix, where air traffic is backed up if someone sneezes on the runway, I didn't think any planes would be landing and taking off for hours.  In fact, operations continued right through the blizzard, and my flight was delayed less than an hour, including de-icing time.  Amazing.  Now if only the SLC airport could increase their security capacity - its only been, what, 4.5 years since 9/11 and most airports seem to have licked this problem.

  • http://www.zianet.com/ehusman/weblog/blogger.html Eric H

    Good God, are you serious? People with those 8th grade notions of what leads to wealth are allowed to talk on CNN? I mean, can't they pick up a copy of PJ O'Rourke's _Eat the Rich_?